Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 72% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

Can Dropbox avoid a cloud-sized hangover?

Dropbox, the secure file-sharing, cloud-computing solution is preparing to launch an IPO on 23 March, valuing the company at around $7.6bn.

The company plans to sell 36m shares between $18 and $20 a share, and is hoping that it doesn’t suffer from the same post-IPO hangovers as previous hyped-up technology stock launches have seen recently, Snap being a case in point.

The company is selling two classes of shares, A and B, with the Class A shares to the public representing 2% of the vote, while the Class B shares will be retained by the founders and early investors.

Snap did something similar last year when it issued shares with no voting rights at all, which rather leaves a potential investor exposed to the whims of management. If the company were profitable there might be some justification; but it isn’t. For this reason alone it is hard to be enthusiastic about investing in a company that has so little regard to any type of feedback from potential new investors.

The company has over 500m registered users, with 11m paying for added features, and though it isn’t currently making a profit, there is at least the prospect that it may well start to. The big question is whether a valuation in the billions is indicative of an accurate assessment of the company’s assets as well as its potential. With tech stocks already at record high valuations it’s a valid question, bringing back memories of another tech stock price surge that ended badly 18 years ago.

Unlike Spotify, another high-profile initial public offering, Dropbox is going down the more traditional route in contracting a number of banks to drive the issue forward.

The company runs a number of different pricing plans with the free service offering up to 2GB of free storage, while the other pricing plans offer a 1TB capacity, with different user options. However its biggest problem is that it doesn’t run a unique service, and as such is in competition with services like Apple’s iCloud, or Microsoft’s cloud services to name just two. This means that in terms of pricing it is vulnerable to loss-leader pricing by its bigger rivals who could choose to squeeze margins due to their bigger scale.

On the numbers front the internals are promising, with revenues rising to $1.1bn last year, an increase of over 30%, while the losses for the business came down from $210m to $112m. The direction of travel here suggests more optimism that the company will eventually turn a profit, and the valuation is much more realistic than other tech IPOs we could mention.

That doesn’t take way from the fact that margins are likely to be vulnerable in what is turning out to be an increasingly competitive marketplace. This means that the shares could become vulnerable if sentiment around the tech sector were to take a turn for the worse. 

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.